Learn The Most Important Foreign Language Of Your Life|Retirement Plan Language

Financial terms and retirement plan language
Just because you do not understand retirement planning language doesn't mean you do not need to plan for your retirement
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Don’t Let Retirement Plan Language Stop You

Do Your Homework

Do you get your retirement plan statement every month and never open it because don’t have a clue about what half of it means?   If you do, then you lack critical knowledge – – – –  retirement plan knowledge.   Having the ability to understand financial terms makes investing a whole lot easier.

Investing Made Easier|Learn The Language

  • Annuities

An annuity is an investment vehicle that has 2 phases.   During the accumulation phase you invest money into the annuity.  During the annuitization phase, you receive payments from the account.

An annuity can provide you with a steady, guaranteed stream of income.   Annuities are used by investors as a way to supplement their other retirement income.

  • Asset Allocation

Spread your risk by dividing your investment money between stocks, bonds and a cash equivalent (money market).   Each of those investment categories has a different type of risk, the likelihood of all 3 categories performing poorly at the same time are small.

Your age, risk tolerance level and financial goals determine your proper allocation.

  • Asset Class

Different asset classes produce a return on your investment in different ways.   Some examples of asset classes include: stocks, bonds, real estate, collectibles and precious metals.

  • Balanced Fund

A mutual fund offers the investment goal of balance so as to provide a strong return with low risk.

  • Capital Gains

The realization of a profit when you sell an asset for more than you paid for it.  You are taxed on that difference.

  • Compounding Interest

Due to the magic of compounding interest, your money makes money for you.  You earn money on your investment earnings.

  • Diversification

You diversify to protect the value of your portfolio.   You spread your assets among different options within an asset class.   For example, you would be better off buying mutual funds that invest in two to three different types of stock vs the same stock.    If you own a mutual fund that invests in technology, industrial and energy stocks, you are more diversified that if you invest in a mutual fund that just holds technology stocks.

  • Employer Match

When your employer matches your retirement plan contribution, you are receiving free money.  Employers can choose a matching formula that is a percentage of your compensation or they can match up to a certain dollar amount.

  • Equity Fund

The mutual fund invests primarily in stocks.

  • Expense Ratio

The amount of money it costs a mutual fund to operate the fund.  These expenses are taken out of your assets, therefore, the higher the expense ratio is, the lower your returns are.

  • Electronic Traded Funds (ETF)

This  investment vehicle trades like stocks and track an index.

  • Growth Fund

Higher risk, longer holding period; potential for greater returns.  These mutual funds generally pay little or no dividends.  The prices are volatile because the investment goal of the fund is growth.

  • Hardship Distributions

These distributions from your 401k retirement plan are allowed if you meet the IRS’s definition of “hard financial need”.   To qualify for a hardship distribution you must use the distribution money to pay for one of the following:

  1. Medical expenses.
  2. Funeral expenses.
  3. Educational expenses.
  4. The purchase of a principal residence.
  5. Avoiding the eviction from a principal residence.

If you are under age 59 1/2 at the time of the hardship distribution, you may have to pay taxes and a 10% penalty.

  • Income Fund

These mutual funds primarily invest in investments that have a lower risk potential and emphasize income, such as dividend paying stocks, high quality bonds or money market.

  • Index Fund

This mutual fund matches a market index.  For example the S&P 500 Index.   With an index fund you will experience lower expenses and a lower portfolio turnover; which results in good returns.

  • Lump-sum Distribution

A one time payment instead of installment payments.   You may want to check with your financial planner and accountant before deciding on which type of payment to take; each type is taxed differently.

  • Rebalancing

Due to possible changes to your time horizon and risk tolerance level you buy and sell within your portfolio to keep your original diversification in tact.

  • Retirement Calculator

A retirement calculator is a financial tool used by many investors to help determine how much money they will need to save to be able to retire.   Based on your time horizon, financial goals and risk tolerance the calculator will give you a fairly good estimate.

  • Retirement Plan Contribution Limits

This is the maximum amount of money the IRS allows you to invest into your retirement plans on an annual basis.   Every year the IRS can change these limits.   The amounts vary depending upon the type of retirement plan.   IRA’s have different contribution limits than 401k retirement plans.

  • Required Minimum Distribution

The amount of money you are required to withdraw from your retirement plans when you reach age 70 1/2.  The retirement plans affected are 401k plans, 403b plans, 457b plans and traditional IRA plans.

  • Risk Tolerance

The amount of risk you are willing to accept with your investments.   Younger investors can generally tolerate a higher level of risk since their investments have a longer time to rebound from market dips.   If you lose sleep worrying about your investments dropping in value, your risk tolerance level is low so choose investments with a lower risk.

  • Roth IRA

One of many types of qualified retirement plans.   Your contributions are not tax-deductible, but your distributions at retirement are tax-free.

  • Traditional IRA

Another type of qualified retirement plans.   Depending upon your income, your contributions could be tax-deductible.  Taxes on your account are tax deferred.   Your distributions at retirement are not tax free; they are taxed when withdrawn from the account.

  • Vesting

Your percentage of ownership in your retirement plan and when you have access to the money in your retirement plan.

Your personal contributions are 100% vested at all times because it is your money.   Your employer’s contributions are usually vested based on a schedule that is determined by your years of service at the company.   Some retirement plans are set up for immediate vesting of employer contributions; this means that you can access your employers contributions right from the start.




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